FATE, IT SEEMS, HAS LINKED the fortunes of the Philippines
and the Aquino family. The charismatic Benigno Aquino Jr.
enjoyed a meteoric political career before falling out with
then-President Ferdinand Marcos and leading the opposition to
his corrupt and dictatorial regime. In 1983, returning to his
homeland from exile in the U.S. to campaign for a return to
democracy, Aquino was gunned down moments after landing at
Manila International Airport.

His widow, Corazon, picked up the reform mantle and led the
historic People Power Revolution that peacefully deposed Marcos
in 1986 and installed her in the Malacañang Palace. Her
six-year presidential term entrenched democracy in the
archipelago nation but did little to improve the countrys
lagging economic performance or bridge the yawning gap between
rich and poor.

Today, Benigno Aquino III is seeking to fulfill his
parents legacy. Since assuming the presidency after a
resounding election victory almost two years ago, Aquino, 52,
has been pursuing a two-pronged strategy that he contends will
enable the Philippines to finally achieve its potential. His
government is leading a crackdown on the corruption that has
plagued the country for decades, and has promised to pursue
wrongdoing at the highest levels. So far, it hasnt
flinched. In November the authorities arrested Aquinos
predecessor, Gloria Macapagal Arroyo, on charges of election
fraud and barred her from leaving the country. In January the
Senate, which is controlled by Aquinos Liberal Party and
its allies, began a trial on articles of impeachment against
Renato Corona, chief justice of the Supreme Court, for failing
to disclose more than 40 million pesos ($930,000) that
investigators found in his bank accounts and for showing
partiality in his rulings toward Arroyo, who appointed him
chief justice days after Aquinos election victory.

Although investors would relish any improvement in a country
that ranks on a par with Syria for corruption, according to
anticorruption organization Transparency International,
theres no guarantee that Aquino will succeed in his
campaign. Opponents have criticized the case against Arroyo as
a politically motivated witch hunt.

The Aquino government is also seeking to combat the
Philippines notorious inequalities and promote
more-inclusive economic growth. To that end, its six-year
development plan  borrowing a page from projects
pioneered in Latin America  is expanding social programs
that make payments to poor families provided that their
children attend school. The plan calls for increasing spending
on new schools, roads and other infrastructure.

For Aquino, who campaigned on the slogan If no one is
corrupt, no one will be poor, improving governance and
extending prosperity are two sides of the same coin.

The key challenge in the Philippines over the years is
official corruption, says Cesar Purisima, the
governments secretary of Finance. In the 1960s the
Philippines was No. 2 to Japan in terms of economic strength in
Asia. In 1965 our total exports were worth more than those of
Taiwan and South Korea combined. Clearly, its not for
lack of natural resources or lack of beauty or lack of talent.
What held us back was administration after administration that
didnt care and mismanaged the country.

Can Aquino and his government deliver? The challenges they
face are immense. The Philippines economy and political
system have been dominated since colonial times by an
oligarchic class of powerful, wealthy families. Weak growth and
vast inequality have limited the expansion of the middle class,
which at just 15 percent of the population, according to World
Bank statistics, makes the Philippines an outlier among
fast-developing Asian countries. An inefficient tax system
leaves the government with fewer revenues as a proportion of
the economy than any other member of the Association of
Southeast Asian Nations. Correcting these problems will take
years of earnest efforts.

One major challenge is for the government to sustain a
higher level of investor confidence by pushing ahead with
policy reforms, says Changyong Rhee, chief economist at
the Manila-based Asian Development Bank, a regional
multilateral lender that is hosting its 45th annual board
meeting in the Philippines capital in early May. Much
remains to be done to improve the business environment so that
private investment and employment grow consistently. Lackluster
employment growth is a chronic problem. Unemployment and
underemployment rates combined have remained close to 25
percent of the labor force, pushing nearly 10 percent of the
countrys population to work in other countries.

Purisima says the government is determined to pursue its
reform agenda, but to last, those reforms must be based on
sustainable growth and fiscal stability. Only then can the
authorities increase infrastructure spending, which is critical
to fostering greater investment, growth and job creation, he
says.

Since taking office in June 2010, the Aquino administration
has adopted a series of belt-tightening measures to cut
spending, while intensifying revenue collection efforts,
including a crackdown on corporate tax evasion and smuggling, a
widespread problem that undermines revenues from tariffs. The
actions helped reduce the governments budget deficit to a
modest 2 percent of gross domestic product last year from 3.5
percent in 2010 and trimmed the national debt by 2.1 percentage
points, to 40.1 percent of GDP. Thats down from a high of
more than 80 percent a decade ago and compares favorably with
Malaysias debt ratio of 58 percent and Thailands 46
percent. Foreign exchange reserves, swelled by remittances from
Filipinos working abroad, rose 24 percent last year, to a
record $77.7 billion.

Aquinos government will be judged, however, on whether
it can translate this fiscal strength into stronger growth and
broader prosperity. The economy slowed down markedly last year,
reflecting the effects of global weakness and the
governments budget tightening. Output expanded by only
3.7 percent in 2011, down from 7.6 percent in 2010. The
government and most private economists expect a rebound in
activity this year. The ADB forecasts the economy will grow by
4.8 percent.

Philippine growth has lagged behind its regional
peers, while poverty, inequality and labor market outcomes have
not improved as much, the World Bank said last month in
its latest quarterly report on the countrys economy. Per
capita GDP stands at a modest $2,255, according to the
International Monetary Fund  less than half of
Chinas $5,184 and well behind Indonesias
$3,429.

The economic slowdown last year was part of the
governments strategy to strengthen its finances and lay
the basis for sustainable growth, Amando Tetangco Jr., governor
of the Philippines central bank, told more than 300
senior business executives at a presentation by the
governments top economic officials at a Manila convention
center last month. He noted that the Philippines last June
won a one-notch upgrade in its credit rating from Moodys
Investors Service, to Ba2. We believe the Philippines can
lay claim to economic resilience, Tetangco said.

Going forward, the government hopes to stimulate growth by
boosting infrastructure spending at a rate of 12 percent a year
through 2016. The lack of paved roads and highways has long
hampered the nations growth and discouraged foreign
investors. The administration also is promoting
public-­private partnerships by reaching out to investors,
reducing bureaucratic red tape and promoting five pillar
industries  agribusiness, business-process outsourcing,
tourism, infrastructure development and creative manufacturing
such as high-end furniture and handicrafts  that draw on
the natural advantages of the Philippines, a resource-rich
country that stretches across an archipelago of 7,100
islands.

To combat poverty, the government is dramatically expanding
a social welfare program of conditional cash payments to
families provided that they send their children to school and
take them to health clinics for regular checkups. The program,
designed with the help of the World Bank, makes payments of
between 500 and 1,400 pesos ($11.65 to $32.65) a month to
households. The program began on a modest basis under Arroyo in
2007, but the Aquino government has expanded it dramatically,
tripling the number of households receiving payments over the
past year, to some 3 million.

We are giving stipends to the poorest of the poor to
keep children in school and bring them to health centers
so that they train for the workforce later on, Finance
Secretary Purisima tells Institutional Investor in an interview
in his office in the central bank complex, which overlooks
picturesque Manila Bay. We plan to continue to expand the
program until all 4.8 million families in the poorest 20
percent of the population are covered, a level officials
expect to achieve by 2014. In addition, the government will
spend 10.5 billion pesos this year to expand existing
schools and build new ones. The program aims to construct 9,300
new classrooms, with a particular focus on rural areas.

Education is critical because the Philippines has one of the
youngest populations in Asia: The median age is just 22,
compared with 25 for Malaysia and India, and 28 for Indonesia
and Vietnam. Purisima says the Philippines will enter a
demographic sweet spot in 2015, when the
working-age population will begin to peak while the segment of
the population under 15 years of age drops below 30 percent and
that over 65 falls below 15 percent.

Countries that have entered the demographic sweet spot
in the past have seen acceleration of growth rates, the
Finance secretary says.

Such a takeoff would be overdue for the Philippines. For
decades subpar growth and low levels of job creation have
forced Filipinos to go abroad in search of work. Currently,
more than 11 million Filipinos  compared with a
domestic population of 94 million  work abroad. The
export of labor has a silver lining, though: Overseas workers
sent $20 billion back to the Philippines last year,
providing a whopping 10 percent of the countrys
$199.6 billion GDP.